Why would a franchise owner sell his franchise?

[AgaBoogaBoo]

I've been browsing local business listings lately and wonder why so many people are looking to get out of the industry for 2-3 years of revenue.

As far as I know, the owners don't have to do a lot. I don't know if they play a role in hiring or leave that up to the manager, but that's all I can think of. It seems like something that wouldn't require too much effort.

Why are most of these people who have listings selling them in the first place?

I know we have some franchise owners here and that's why I'm asking. One listing for example showed an annual cash flow of $40k, and an asking price of 120k. That just seems too easy because once you have the initial capital, it's not hard to grow from there.

Any thoughts? What big factors am I missing?

 

[ericb]

I don't see a lot in my area but most of the time they are either retiring or they have multiple locations and are selling off the least profitable.

 

[Ns1]

Originally posted by: AgaBoogaBoo
I've been browsing local business listings lately and wonder why so many people are looking to get out of the industry for 2-3 years of revenue.

As far as I know, the owners don't have to do a lot. I don't know if they play a role in hiring or leave that up to the manager, but that's all I can think of. It seems like something that wouldn't require too much effort.

Why are most of these people who have listings selling them in the first place?

I know we have some franchise owners here and that's why I'm asking. One listing for example showed an annual revenue of $40k, and an asking price of 120k. That just seems too easy because once you have the initial capital, it's not hard to grow from there.

Any thoughts? What big factors am I missing?

if you have a manager you're not making money, if you ARE the manager you don't have a life.

 

[AgaBoogaBoo]

Originally posted by: ericb
I don't see a lot in my area but most of the time they are either retiring or they have multiple locations and are selling off the least profitable.

Selling the least profitable ones makes sense, but if it's profitable and you don't have stock holders that are complaining, why would it matter? If it means an extra $1,000 per month in your portfolio, why not just let it run?

 

[AgaBoogaBoo]

Originally posted by: NeuroSynapsis

Originally posted by: AgaBoogaBoo
I've been browsing local business listings lately and wonder why so many people are looking to get out of the industry for 2-3 years of revenue.

As far as I know, the owners don't have to do a lot. I don't know if they play a role in hiring or leave that up to the manager, but that's all I can think of. It seems like something that wouldn't require too much effort.

Why are most of these people who have listings selling them in the first place?

I know we have some franchise owners here and that's why I'm asking. One listing for example showed an annual revenue of $40k, and an asking price of 120k. That just seems too easy because once you have the initial capital, it's not hard to grow from there.

Any thoughts? What big factors am I missing?

if you have a manager you're not making money, if you ARE the manager you don't have a life.

That makes sense, I guess I was assuming that these numbers factored all that in. Maybe I should contact one and see what it is, then post back here.

 

[amish]

find out what the % going to the head franchise is. sometimes the return isn't worth the time.

 

[imported_Mike]

Originally posted by: AgaBoogaBoo

Originally posted by: ericb
I don't see a lot in my area but most of the time they are either retiring or they have multiple locations and are selling off the least profitable.

Selling the least profitable ones makes sense, but if it's profitable and you don't have stock holders that are complaining, why would it matter? If it means an extra $1,000 per month in your portfolio, why not just let it run?

Not enough time. If an extra $1k/month is more important then family (insert whatever) then your point stands. People value time more then extra cash.

 

[Ns1]

wait; are you looking at this to start a business or to get an investment?

 

[AgaBoogaBoo]

Originally posted by: amish
find out what the % going to the head franchise is. sometimes the return isn't worth the time.

Ah, didn't think about that yet, I was being ignorant looking at these numbers and assuming it factors all that in.

Originally posted by: NeuroSynapsis
wait; are you looking at this to start a business or to get an investment?

If I did it, as an investment, probably with another person.

 

[AgaBoogaBoo]

Originally posted by: Mike

Originally posted by: AgaBoogaBoo

Originally posted by: ericb
I don't see a lot in my area but most of the time they are either retiring or they have multiple locations and are selling off the least profitable.

Selling the least profitable ones makes sense, but if it's profitable and you don't have stock holders that are complaining, why would it matter? If it means an extra $1,000 per month in your portfolio, why not just let it run?

Not enough time. If an extra $1k/month is more important then family (insert whatever) then your point stands. People value time more then extra cash.

That makes sense, I just assume that if you have a manager handling it, there wouldn't be a lot. Like someone else said, I don't know if the numbers include a manager or not, and so that's a good point that I should check into.

 

[Ns1]

Originally posted by: AgaBoogaBoo

Originally posted by: amish
find out what the % going to the head franchise is. sometimes the return isn't worth the time.

Ah, didn't think about that yet, I was being ignorant looking at these numbers and assuming it factors all that in.

Originally posted by: NeuroSynapsis
wait; are you looking at this to start a business or to get an investment?

If I did it, as an investment, probably with another person.

you'd probably want to get an audited set of financial statements then, but I bet that 40k revenue stems from him working there

 

[vi edit]

Could be a whole pile of things that aren't really thought of at face value.

Franchise fees
Maybe he has a property lease coming up that he can't renew or renew at a reasonable rate
Maybe the franchise is trying to reneg his franchise contract
Maybe his wholesale vendors are crappy or expensive
Maybe his profits have plummeted over the last couple years making it not worth it
Maybe he has some loans that are hitting a ballon payment that he can't refi.

Hard to say.

 

[imported_Mike]

Originally posted by: AgaBoogaBoo

Originally posted by: Mike

Originally posted by: AgaBoogaBoo

Originally posted by: ericb
I don't see a lot in my area but most of the time they are either retiring or they have multiple locations and are selling off the least profitable.

Selling the least profitable ones makes sense, but if it's profitable and you don't have stock holders that are complaining, why would it matter? If it means an extra $1,000 per month in your portfolio, why not just let it run?

Not enough time. If an extra $1k/month is more important then family (insert whatever) then your point stands. People value time more then extra cash.

That makes sense, I just assume that if you have a manager handling it, there wouldn't be a lot. Like someone else said, I don't know if the numbers include a manager or not, and so that's a good point that I should check into.

You're obviously thinking with the mindset of you, the buyer. You're only planning on running one. If the seller has a half dozen of these or even just 2-3, but doesn't have the time, easier just to sell.

 

[AgaBoogaBoo]

Originally posted by: vi_edit
Could be a whole pile of things that aren't really thought of at face value.

Franchise fees
Maybe he has a property lease coming up that he can't renew or renew at a reasonable rate
Maybe the franchise is trying to reneg his franchise contract
Maybe his wholesale vendors are crappy or expensive
Maybe his profits have plummeted over the last couple years making it not worth it
Maybe he has some loans that are hitting a ballon payment that he can't refi.

Hard to say.

Yeah, the property lease part is what I'm seeing in many of the listings, they have a renewal coming up or it will be simply ending, and they will be required to move.

 

[BuMMiE]

Well the expenses could be 30K with a revenue of 40K leaving a net income of 10K. You also shouldn't forget about taxes and the growth/decline of the business.

 

[ddwbi0]

That 40k is probably before any expenses (franchise, salary, taxes, cogs, etc)

 

[Fern]

Originally posted by: AgaBoogaBoo

Any thoughts? What big factors am I missing?

Franchises are often more complicated to evaluate, and more difficult to operate than you might imagine.

They often require a number of managerial type reports to be filed frequently.

They often exert an excessive amount of control over YOUR business.

You likely will have inventory or other purchase agreements that you require you purchase all your stuff from them for non-negotiable price.

There are matters of what territory are yours, you don't others with a similar franchise encroaching. Plus, you want to lock in the rights in case you wanna expand etc.

Franchises have to comply with S.E.C. disclosure and therefore usually have big package of lots of documents that need to be read and understood.

Fern

 

[Josh]

Revenue does NOT equal profit.

Let's say the fairly small moving company that I'm employed for does around $40K a MONTH in revenue...doesn't mean the owner is making $480,000 a year. He has to pay people and you know do all those things that cost money that go into running a successful business.

 

[sciencewhiz]

Here's two good links to read:
http://explorebiz.net/articles/hb05.html
http://www.gaebler.com/Why-Franchises-Fail.htm

I'd guess that your profit margin would be less then 20% (quite possibly under 10%) therefore, if you buy it for 2 times revenue, it would be at least 10 years before it pays for itself.

The I Love Lucy episode "The Diner" has a good take on this.

 

[AgaBoogaBoo]

Originally posted by: Josh
Revenue does NOT equal profit.

The fairly small moving company that I'm employed for does around $40K a MONTH in revenue...doesn't mean the owner is making $480,000 a year. You have to you know pay people, and all those other things that go into running a successful business.

Right, this was yearly cash flow.

This isn't my first business (looks in signature) and so I'm not entirely new to this.

 

[dullard]

With all those replies, I can't believe only two mentioned that revenues and profits are different. If the revenue is $40k/year and the costs are $35k/year, then you earn $5k/year.

(1) $5k/$120k = 4.16% return on your investment. If you had $120k, you'd do far better just sticking it in a high yield bank account. Or even better than that, invest it.

(2) $5k is a measly amount of money to live on. Think about it, if you are running a store, can you live on just $5k/year of income?

(3) Ok, I just made up the $35k expense part. Lets say it is a business with $0 costs. Still, you only earn $40k/year. Most franchise owners need to work 60-80+ hours per week. That works out to be $9.62 to $12.82 an hour. Sorry, but you can get much nicer 9 to 5 jobs with lots less stress for $12.82 an hour.

That is why they are selling.

 

[AgaBoogaBoo]

Originally posted by: dullard
With all those replies, I can't believe only two mentioned that revenues and profits are different. If the revenue is $40k/year and the costs are $35k/year, then you earn $5k/year.

(1) $5k/$120k = 4.16% return on your investment. If you had $120k, you'd do far better just sticking it in a high yield bank account. Or even better than that, invest it.

(2) $5k is a measly amount of money to live on. Think about it, if you are running a store, can you live on just $5k/year of income?

(3) Ok, I just made up the $35k expense part. Lets say it is a business with $0 costs. Still, you only earn $40k/year. Most franchise owners need to work 60-80+ hours per week. That works out to be $9.62 to $12.82 an hour. Sorry, but you can get much nicer 9 to 5 jobs with lots less stress for $12.82 an hour.

That is why they are selling.

As I said above, I realize that profits and revenues are different

I have a good bit of research ahead of me to look into this.

Originally posted by: sciencewhiz
Here's two good links to read:
http://explorebiz.net/articles/hb05.html
http://www.gaebler.com/Why-Franchises-Fail.htm

I'd guess that your profit margin would be less then 20% (quite possibly under 10%) therefore, if you buy it for 2 times revenue, it would be at least 10 years before it pays for itself.

The I Love Lucy episode "The Diner" has a good take on this.

Thank you, I just read both articles and appreciate it

 

[jjones]

Annual revenue of 40k/year seems piss poor. For that kind of money, the business better almost run itself and not cost too much to operate.

 

[AgaBoogaBoo]

Originally posted by: jjones
Annual revenue of 40k/year seems piss poor. For that kind of money, the business better almost run itself and not cost too much to operate.

Yes, it would be horrible, the listing had it as the annual cash flow, not revenue, I just edited the OP.